3 minute read

KEY PRINCIPLES

Miller Center’s John Kohler (along with others) co-founded six years ago. These experiences provide a unique starting point from which emerged the structure for a second-generation 100% impact investment portfolio: Total Portfolio Activation for Impact.

1.1 THE NEED FOR A NEW INVESTMENT APPROACH

Advertisement

The Total Portfolio Activation for Impact strategy is expected to be most attractive to asset owners, family foundations, mission-based institutions (e.g., Catholic institutions, international non-governmental organizations [INGOs]), universities, and corporations interested in achieving social good with their money but who also want reasonable returns on their investments. To date, these investors have allocated a portion of their investment activities to include social and environmental impact, but they have lacked sufficient number of entry points into a broader array of asset classes.

The strategy is also relevant to fund managers and investment advisors looking for a more sophisticated response to clients who desire access to a mission-based or diversified portfolio of both direct and indirect impact investment opportunities for at least a portion of their investable assets.

Previously, the majority of investment approaches forced interested capital to trade off between social impact and financial returns. Often, impact-interested investors rely on traditional investing for their financial returns and turn to philanthropy to fulfill their desires for social impact—creating separate, parallel pathways for their capital. But while philanthropy plays a critical role in providing social benefit—for example, in response to disasters and other emergencies or to de-risk investments—it alone is not sufficient to enable systemic and long-term social and environmental benefit.

The Total Portfolio Activation for Impact strategy provides an attractive alternative for those interested in fueling positive social and environmental change, building on recent work and demonstrating the existence of investment targets able to provide intentional impact within a broad set of asset classes. The strategy also helps manage the risk inherent in investing in concentrated positions by diversifying financial and impact risk across multiple asset classes.

1.2 THE TOTAL PORTFOLIO ACTIVATION FOR IMPACT STRATEGY— KEY PRINCIPLES

The notion of investing capital with the intent to generate both financial returns and positive social or environmental impact has captured the imagination of thoughtful investors across the globe.

The Total Portfolio Activation for Impact portfolio strategy is designed with the following tenets in mind:

Intentionality—The Global Impact Investing Network (GIIN)3 defines intentionality as the purposeful aim of the investor to generate social and/or environmental impact through investments. The asset allocation strategy should go beyond negative screens and focus on responsible, thematic, and/or impact-first investments. For example, investments might increase access to financial services, education, healthcare, affordable housing, or high-quality employment for underserved populations. Investments might also be focused on solutions aimed at mitigating the negative effects of climate change and environmental degradation. Investor activities can be focused in developed or emerging markets, or sometimes both. Investment themes that lend themselves to an attractive and measurable amount of impact are given in Section 1.6.

Investment with return expectations—Impact investments have the potential to deliver competitive, risk-adjusted financial performance with far-reaching social and environmental impact. Recently, the results of a few pioneering 100% impact portfolios have been made available and demonstrate that effective impact investments largely compare with the returns earned with traditional asset-class strategies. In particular, “Essentials of Impact Investing”4 and “Evolution of an Impact Portfolio: From Implementation to Results” are beneficial and informative resources.

Investment strategy applied across asset classes—Impact investing is a portfolio strategy that can be applied across multiple asset classes, which is a relatively new development in the impact investing sector (e.g., cash and cash equivalents, fixed income, real assets, public equities, private equity and debt, structured notes). For many years, the only option for new impact investors was to make direct equity investments into private startups. Section 3.2 provides a sample asset allocation framework.

Impact measurement—As recognized by GIIN, a hallmark of impact investing, is a commitment to measure and report the social and environmental performance and progress of underlying investments. Impact considerations must be taken into account during the:

a. Due diligence process to validate the potential impact of an investment

b. Term sheet development to make sure the managers are all in alignment around impact

c. Growth of the investments to monitor increased impact

d. Exit of an investment to quantify sustainable impact

See Section 2.0 for more details on defining and measuring impact.

This article is from: